GCC asset sales will broaden funding sources
GCC countries have been accelerating asset sales of minority stakes in their government-related entities (GREs), especially Saudi Arabia and the UAE, the most recent of which was the Dubai Government’s public listing of Dubai Electricity and Water Authority (DEWA) in the local stock market, among ten government companies slated for listing.
Standard & Poor’s (S&P) considers selling stakes in government-related entities in the GCC as a positive trend as it further develops debt and equity markets in these countries, creates revenue generation opportunities, and increases market transparency due to requirements of disclosure from the issuing entities. It is also considered evidence of the strong financial position of intergovernmental entities.
In a report on the sale of stakes in GREs in the GCC with a focus on Saudi and the UAE, the agency said that the sale of stakes in government assets is a channel to attract foreign investment to support the governments’ agenda, including economic diversification plans.
The agency says that Saudi Arabia is working under Vision 2030 to diversify its economy away from oil, promote private sector development through investments across various sectors such as tourism, energy, industry, etc., and further deepen capital markets.
It indicated that GREs will have a very important role in creating investment opportunities across strategic sectors, in addition to raising capital.
Given that the Public Investment Fund o(PIF) owns large stakes in most of the major GREs, including Saudi Telecom, Saudi Electricity, ACWA Power, and other entities, it will have a central role in decisions to liquidate assets, attract capital, and allocate investment within the framework of the program.
S&P noted that the Kingdom wants to invest about 5 trillion Saudi riyals (1.3 trillion dollars) in its economy, via some programs such as the “Partnership” program and the Public-Private Partnership Program.
The Aramco IPO is a milestone
The agency stated that the success of the IPO by Aramco in late 2019 was a milestone. While 2020 was a slow year due to the fallout from the COVID-19 pandemic, there was a significant acceleration in activity in 2021.
It continued, “Nearly $30 billion raised through the sale of 1.73 percent of Saudi Aramco shares in December 2019 was transferred to the government’s PIF for investment locally and abroad. The monetization of government assets can serve as a channel to attract foreign investment. To support government plans, including its plans for economic diversification,
Aramco announced two major sale and leaseback deals in 2021 to monetize future cash flows from its pipeline network.
In April 2021, Aramco announced the sale of a 49 percent stake in the Aramco Oil Pipelines Company to a consortium led by EIG Global Energy Partners for upfront proceeds of $12.4 billion. The entity owns lease rights to Aramco’s crude oil pipeline network for a period of 25 years.
Last December, it announced that it had reached a similar deal to sell a 49 percent stake in a newly created entity that owns 20-year lease rights to pipelines that transport gas across the kingdom, and this to a group led by BlackRock and Hasana Investments in return for upfront proceeds of $15.5 billion.
The report noted that 3 companies, in which the Public Investment Fund owns a majority stake, carried out transactions in the stock market in 2021.
ACWA Power, one of the largest utility companies, as a developer, investor, and operator of power generation and water desalination plants in more than 60 countries, listed its shares on Tadawul.
Next, Saudi Telecom Company listed 20% of its shares in its subsidiary, the Arab Company for Internet and Communications Services, on the stock exchange.
On December 14, 2021, the PIF completed the sale of 6 percent of the shares of STC through a secondary offering for $3.2 billion, while retaining the majority ownership of 64 percent.
Finally, in December 2021, Tadawul itself, the largest stock exchange in the Middle East by traded value, floated its shares.
Over the past five years, the Abu Dhabi government has reorganized some of its GREs, improved their performance, enhanced their level of governance, and attracted institutional investors to support the development of the non-oil economy and capital markets in Abu Dhabi.
There were major mergers in the banking sector, such as the merger of First Gulf Bank and National Bank of Abu Dhabi in 2017, or the merger of Abu Dhabi Commercial Bank, Union National Bank, and Al Hilal Bank.
Mergers extended to the main sovereign wealth funds, such as the merger between Mubadala and the International Oil Investment Company, as well as the establishment of the Holding Company.
S&P expects that both Mubadala and The Holding Company will remain active players in the capital markets over the next few years.
ADNOC is a leader in terms of opening its main assets to investors
The Abu Dhabi National Oil Company (ADNOC) is the Abu Dhabi Government’s leading entity in opening major assets to institutional investors through equity market and private deals. In 2019, the company sold a 40 percent stake in ADNOC Oil Pipelines, to a consortium led by KKR and BlackRock, for $4 billion.
In June 2020, ADNOC announced the completion of a similar agreement, as it sold a 49 percent stake in ADNOC Gas Pipeline Assets to a consortium comprising a number of investors for upfront returns of more than $10 billion.
Finally, in September 2020, it announced that it had entered into an agreement with Apollo Global Management, where it sold a 49 percent stake in Abu Dhabi Real Estate Leasing Holding Company, which owns a real estate portfolio worth $5.5 billion, to raise $2.7 billion.
In terms of stock market transactions, in 2017, ADNOC listed the Abu Dhabi National Oil Company for Distribution for $851 million and made a secondary offer in 2021. It also listed its stake in ADNOC Drilling on the Abu Dhabi Securities Exchange for $1.1 billion. Vertiglobe Inc. was then listed.
Transactions outside ADNOC included Yahsat. S&P expects that the IPO market for GREs will remain active in 2022 as well.
S&P expects government support to come not only to government-controlled entities but also to private sector banks.
It has been observed over the past few years that there is a trend of government shareholders in the GCC countries merging their assets to form larger banks. The most recent deal was the merger of the National Commercial Bank and Samba Financial Group to form the Saudi National Bank.
According to S&P, such developments could help governments fund their strategic initiatives and economic transformation plans, although they expect this funding to be done remotely.
In addition, part of the capital of these banks is generally included in the local capital markets to help them develop and share the wealth with the local population.
As for non-financial companies, S&P considers the increased participation of institutional investors and the inclusion of stock markets as supportive of corporate governance practices.
In contrast to the banking sector, there has been no significant M&A activity in the insurance sector so far. So, the agency sees the consolidation of entities with common shareholders as a possible scenario over time.
The agency believes that the private sector in the Gulf region still needs to be developed and is dominated by family groups, in which financing from local banks remains dominant.
Increasing the participation of major government-related entities in the capital markets would not only create momentum for the capital markets, but would also provide institutional investors with access to key strategic sectors in the region, such as oil, gas, and utilities, and generate more interest from investors.